Brown Bag Lunch Seminar: How Much External Demand Contributes to the Growth of the Chinese Economy?

Background

The global financial crisis and the eurozone crisis have led to questions about the sustainability of the People’s Republic of China’s dependence on external demand. However, conventional measures of external demand: net exports-over-GDP and exports-over-GDP are biased and do not accurately measure the contribution of external demand to GDP growth. This paper proposes a simple GDP accounting approach to more accurately measure the contribution of external demand to the growth of the Chinese economy. Our estimates suggest that the dependence of the Chinese economy on external demand increased after its entry to the WTO. In 2001, external demand accounted for 18.2% of GDP growth and by 2004 the share rose to 49%. Our estimates also show that the impressive recovery of the Chinese economy in the post-crisis period owed at least 53% of its growth to external demand. Based on these results, we conclude that the Chinese economy remains highly dependent on external demand and re-balancing the economy towards domestic demand has not yet been achieved.